Everything is becoming more expensive. With the cost of raw materials, salaries, and energy on the rise, companies need to follow suit and raise their prices to avoid (an even stronger) pressure on their margins. However, very few firms manage to push through price increases in a way that’s sustainable and protects them from margin erosion. Andrea Maessen and Sebastian Strasmann provide an overview of where companies are going wrong and how they can succeed.
Successful pricing isn’t a one-time activity; every company has to deal with price increases sooner or later. According to a recent survey conducted by Simon-Kucher & Partners, only 17 percent of companies in the construction industry successfully implement their price increases as planned (i.e. achieving at least 80 percent of their targeted increase). Moreover, nearly half of the companies achieved less than 60 percent of their targeted price. This means, from an announced three-percent price increase, only 1.1 percent could actually be achieved. Is this result worth all the effort of negotiating prices, mobilizing the sales teams, and dealing with customers? With ten simple tips, it is not only possible to minimize risk of failure, you can also ensure implementing a price increases close to the level originally planned.
Many companies are unaware that they keep repeating the same mistakes when it comes to price increases. Here is what they should avoid going forward:
- Don’t rely on just one price increase a year: Nearly 60 percent of study participants only increase their prices once a year. With this approach, companies lack the flexibility to react quickly to slumps in sales or higher costs of raw materials. They increase the threat of margin erosion. By negotiating new prices two or three times a year, they can better adapt prices to market and cost developments
- Don’t be too moderate: Less than 10 percent of companies stated they could afford a price increase of more than 5 percent, and around one third raised prices by less than 2 percent. Even if implementation is successful, such a small increase won’t provide net value to the company. In times of rising raw material costs, small price increases are not worthwhile and should be reconsidered
- Don’t only talk about cost and neglect value: Almost 90 percent of study participants justified price increases by claiming they are simply passing on cost increases to customers. While this may be true, it’s not enough. Instead, communication should focus on the added value products and accompanying services provide customers
- Don’t blame the market: Most companies believe external factors are the reason why their price increases fail, blaming competitors for not increasing their prices or customers for not accepting the higher price. Companies need to alter their strategy by concentrating on the things they are able to change within their own organization to make price increases stick. Vague anecdotes about competitive prices must be systematically refuted, and success stories of colleagues implementing price increases must be communicated internally and celebrated
- Don’t increase prices without preparation: Fear and doubt are the enemies of any price increase. Good preparation will enable companies to move forward confidently. Companies need to develop convincing arguments with their sales teams to position themselves effectively in negotiations. A number of activities are useful for this, such as getting all employees involved in customer contact to write down five justifications for the price increase, compiling comprehensive Q&A catalogs, and rehearsing customer discussions.
It’s clear now what is preventing price increases from being successful, but what can companies do to make price increases happen?
- Do differentiate price increases (correctly): Blanket price increases across the entire product portfolio don’t make sense. Instead, companies should differentiate between price increases at the customer level and at the product level. Before applying price increases, it is for example essential to identify products with relatively low price sensitivity and differentiate the increase for them
- Do ensure commitment of top management: Companies often have to choose between higher market shares and higher prices. If they decide to increase prices, it’s important top management commits to this strategy and is clear on this to the teams
- Do use additional pricing elements: As well as raising the price of the product, it may also be worthwhile to charge for services separately or increase service charges. It might also be considered to add a new mechanism to the price increases, such as surcharges for raw materials or logistics costs that automatically move with the move of these costs. If the customer understands the mechanism and where these costs are coming from, there won’t be any need to discuss them
- Do motivate sales teams: According to the survey, only 17 percent of companies offer their sales teams variable remuneration to reward successfully implemented price increases. Since sales teams have direct contact with customers and are the decisive factor in negotiations, it makes sense for them to profit directly from higher prices
- Do follow through with price increases: These tips are only effective if companies apply them consistently and don’t give up too early